[U]4. Be profitable everyday.[/U]
Now I am attempting some position sizing and profit booking conditions.
(These are key points that every trader must address to stay profitable long term, but I will just treat them as guidelines and do not plan to mark them on the charts. Doing the calculations in an Excel sheet or Calculator is fine, but marking everything on iCharts is a pain.)
[B]Position Size:[/B]
Decide on the amount that you can risk per trade for the day. Then calculate the risk in points (including costs).
Costs = Brokerages+Taxes+Slippages
For example, let's say you decide that the risk per trade for the day is Rs. 10000, and the OR High is 5000 and OR Low is 4970. In this case, assuming a buffer to 5 points, ORB happens at 5005 and 4965. Let the cost to be 3 points per round trip (entry and exit - assuming you trade Nifty Futures with good volume), but conservatively, for calculations, we will take the cost as 5 points per round trip.
So the risk in points will be (5005-4965+5)=45 points.
Position Size = 10000/45 = 222.2 units -> 200 (rounded down)
Yet to decide: Rest of Money Management - including how to decide the risk per trade for the day.
[I](OR = Opening Range, ORB = Opening Range Breakout)[/I]
Note: If your costs are higher in futures, check if your costs are lower on options. You will have to choose the right options (ITM). Also, slippages will be higher in ITM options.
[I](ITM = In the money)[/I]
[B]Sizing Points:[/B]
These are points at which you adjust your position size upwards or downwards based on new TRPs. For a long trade, sizing points will be DL Bar Highs and HH1. For a short trade, sizing points will be DL Bar Lows and LL1. While upsizing should be done only on DL TRPs, downsizing can be done on any TRP.
[U]Example 1 - upsizing at DL:[/U] Continuing with the above example, let's say we went long on ORB at 5005, with a position size of 200 Nifty Futures (4 lots). Let's say we are in a good uptrend and after some time in the trend, we get a DL bar with high of 5040 and low of 5035. Your risk in points for the DL Bar will be (5040-5035+5) = 10 points. With this, you can a have a position size of 10000/10 = 1000 units. But since your current position size is long only 200 units, you can place buy stop at 5040 (or rather 5040.05) for 800 units on completion of the DL Bar. - Quick Gun Murugan says: "Macha, be quick to place the orders, you also need to place SAR orders at the DL Low. MIND IT!!". If your buy stop is hit, you will be long 1000 units with SL(SAR) at 5035.
[U]Example 2 - downsizing at HH1:[/U] Let's say the uptrend continues in the Mungerilal world, and the price reaches a high point (HH1) of 5050, and then comes down to form a Pivot Low of 5040, and then starts moving up again. If the price crosses 5050, then there would be a new TRP at the Pivot Low - Bufffer, 5040-5 = 5035. Your risk in points for the new TRP will be (5050-5035+5) = 20 points. With this, you can a have a position size of 10000/20 = 500 units. But since your current position is long 1000 units, you place a limit Sell order at 5050 for 500 units.
(Between Example 1 and 2 the TRP remained constant at 5035, but whatever... you are just trying to find a reason to lock profits)
[I](DL=daylight, HH1=Higher High 1, HH2=Higher High 2, LL1=Lower Low 1, LL2=Lower Low 2, PL = Pivot Low, TRP = Trend Reversal Point, SL = Stop Loss, SAR = Stop and Reverse)[/I]
[B]Lock Profits:[/B]
All the funky calculations to lock profit by downsizing is fine, but sometimes you do not get the scenario needed to downsize as above. What then? Answer: Find other reasons to lock profits.
1. One very good reason that I use is to Exit 100% at Close of favorable High Volume WRB (If the Range and Volume are visible even before close, but the direction reverses in the middle of the bar, place an SL at the bad end of the bar). Calculate the new risk in points and position size and reenter if price breaks the good end of the WRB.
2. Exit 50% at x times initial risk of the at point of entry. Here we take risk as the |(Entry-SL)|. x varies depending on the type of TRP.
- If entry was on a DL on the first or second bar of the day (DL due to intraday gap), then x=2.
- If entry was on a DL on any other bar, then x=3.
- If entry was on a DL bar that whipsawed once, then x=2.
- For any other entry, x=1.
Place limit orders to exit. But if you see a straight up or straight down move in your favor, you might want to cancel the limit order, and wait for the move to stop before exiting. (One way is to exit on a bar close on the other side of the 3SMA)
Yet to decide: Exits at Trailing Stops, Bands, etc. I use a wide % trailing stop in other systems. In this system, there are very few opportunities to use a wide trailing stop.
[I](WRB - Wide Range Bar. Good End - end where I get more money, Bad End - end where I get less money)[/I]